Pay Attention To Tesla's Potential As A Service Business, Not Musk's Antics

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I write about investment themes and opportunities in the stock market.

(AP Photo/Kiichiro Sato, File)

Tesla is seemingly always in the eye of the storm, underscored by the weeks-long drama surrounding Elon Musk’s cryptic tweet about his plans (since scrapped) to take the company public and, more recently, his antics during an appearance on a popular podcast. Why the media obsesses over his quirks is understandable – he’s brash, unpredictable and never particularly shy about offering his opinion, even when it’s ill-advised.

Because of that, many often miss the big picture. The media frequently portrays Tesla as a promising yet debt-ridden car company continually beset by production delays and capital concerns. That’s not to say those issues are immaterial. They’re not.

Eventually, the company will have to overcome those hurdles, and, in my view, they will. What gets ignored, though, is that Tesla is much more than a mere car company – even as it has the power to transform the world in that capacity, serving as an impetus to change our nation’s gas-guzzling ways.

Tesla’s future – and real potential – is as a software-as-service business, much like the way Apple and Google operate.

Autonomous cars becoming ubiquitous is a matter of when, not if. When that happens, millions of drivers will turn into passengers and occupy the time it takes traveling from point A to point B in other ways, including scrolling through in-car monitors, just as they would on a smartphone. Having access to that browsing history and data, along with the vehicle’s location, will become increasingly valuable.

Meanwhile, for ride-sharing services like Uber and Lyft, developing autonomous driving systems is a matter of survival. Paying drivers is by far their most significant expense and how quickly they can shed those costs will go a long way in determining whether their current valuations are justifiable

This is where Tesla, a presumed leader in autonomous driving technology, and its in-car screens come in. Were it able to win the self-driving race, that would allow the company to more reasonably team with one of the big ride-share companies successfully, giving Tesla access to millions of people's data, not just the select few who own its cars.

Traditional car makers are not nearly as well positioned to do this. Almost all cars, as Musk has pointed out, sit unused most of the time. Ride-sharing services have and will continue to change that. In the future, cars not only won’t be anchored as much but there will be fewer of them on the road.

Part of the reason is that alternative forms of transportation are becoming more mainstream, including electric bikes and scooters. The bigger issue is the dual and overlapping trends of autonomous cars and the broader adoption of ride-sharing services will lead to fewer people owning cars, in a way mirroring how streaming services have slashed the number of cable TV subscribers in recent years.

Indeed, just as many millennials will never subscribe to a cable or satellite TV provider, it’s not hard to imagine the young children of today going their whole lives without ever driving a car. Given that large automakers are volume-based businesses, it’s very likely that they could be facing an existential crisis in the years to come.

Tesla’s future is not as tethered to volume. Instead, it’s about producing high-performing electric cars, and then allowing a shared software ecosystem to serve as a vehicle for highly targeted digital ads, based on the data it gleans from a rising number of users, as well as a game, entertainment and communication console. Because of this app, developers will likely create software specifically with Tesla in mind, just as they have for Apple.

This is why Tesla is a huge threat to the status quo. As its ecosystem expands, the company will acquire the data from all its drivers. With many of us spending over an hour a day in a car, Tesla's ability to provide services as they expand its hardware (car) business starts to look remarkably similar to Apple 10 years ago.

Commentators should focus on this instead of Elon Musk’s eccentricities.

Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki Inc., a SEC-registered investment advisor with approximately $830 million in assets under management. Gerber Kawasaki clients, firm and employees own positions in Tesla, Google and Apple. Please seek guidance from an investment advisor before making any investment. All investments involve risk.

I'm the Co-Founder, President and CEO of Gerber Kawasaki Wealth and Investment Management, an SEC Registered Investment Advisor. I oversee Gerber Kawasaki's corporate and investment management operations as well as serve individual clients. I'm is a frequent guest on CNN, C...